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Southern Missouri Bancorp Inc (NASDAQ:SMBC)
Q4 2020 Earnings Call
Jul 28, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Matt Funke. Mr. Funke, please go ahead.

Matt Funke -- Executive Vice President, Chief Financial Officer

Thank you, Keith, and good afternoon, everyone. This is Matt Funke, CFO of Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, July 27th, 2020, and to take your questions. We may make any -- we may make certain forward-looking statements during today's call, and we refer you to our cautionary statement regarding forward-looking statements contained in the press release. I'm joined on the call today by Greg Steffens, our President and CEO.

So thank you to all of you for joining us today. And to start out, we want to just provide a quick update on the Bank's operations in the COVID-19 environment. While the states where we primarily operate have significantly loosened restrictions since April, we have seen increased COVID cases and positivity rates, and some of our communities are ratcheting back up some restrictions. The Bank did reopen lobbies in May, and we continue to remain fully open, although we do encourage our customers to continue to utilize drive-throughs when possible. And we're also seeing continued higher usage of our interactive teller machines and our mobile and online channels. We're continuing to encourage a number of our administrative team to work remotely, at least some of the time, and we're trying to use good judgment about the necessity of business travel. Greg?

Greg Steffens -- President, Chief Executive Officer

Thanks Matt, and good afternoon, everyone. I want to provide a brief update on our lending activities under the SBA PPP program. Since our last call in late April, the Bank originated an additional $23 million in PPP loans, and we have a total of $132 million outstanding at June 30th. We are also continuing to originate a relatively small amount of loans under the program, and we anticipate beginning to forgive this process around mid-August.

We are continuing to follow regulatory guidelines, working with our borrowers affected by the pandemic by providing modifications and deferrals to loans that were otherwise current or performing, but anticipating difficulties due to the pandemic. Through June 30th, we've approved deferrals and modifications totaling $380 million to assist these customers. Almost all deferrals are for a three-month period, while our interest-only modifications have been for six month periods. Approximately $35 million of our deferrals and modifications are in our single-family portfolio, $30 million in multifamily, $81 million in owner-occupied CRE, $192 million is in our non-owner occupied CRE and $23 million in commercial loans.

Within owner-occupied CRE, 42% of deferrals and modifications by dollar value were restaurants, 18% are convenient stores, 10% are to manufacturers, and 9% are to retail. Within non-owner occupied CRE, 34% are to hotels, 30% of deferrals and modifications are multi-tenant retail, 12% were to restaurants, 8% were to care facilities. Finally, within the C&I loans, 26% of deferrals and modifications are to transportation warehousing, 15% manufacturing, 13% are to accommodation or food service, 12% to retail trade, 9% are to administrative support for waste management services, and 7% were to healthcare or social assistance firms.

Also, I want to touch at this time on credit quality. Our non-performing loans were down approximately $2.8 million or about 17 basis points on gross loans since March 31st. And we saw a good improvement in loans greater than 90 days past due, which are down approximately $3.6 million and classified loans, which are down $3.9 million. Loans past due 30 to 89 days were down $5.9 million and $6.4 million all past due loans are 29 basis points as compared to $15.9 million at March 31st and $11.6 million or 62 basis points one year ago. We have also provided a detailed breakdown of our loan portfolios on Page 10 of our earnings release. Overall, we are quite pleased with the underlying performance of our loans. The loans that we granted deferrals for modifications are primary area of concern at this time relates to our hotel portfolio for which we downgraded several loans during the quarter due to poor occupancy during the pandemic.

Our restaurant and multi-tenant retail portfolios have been performing better than we anticipated three months ago, and we are anticipating limited problems within these portfolios at this time. We continue to monitor these portfolios closely to determine how they are performing as we continue to endure the impact of the pandemic. We remain comfortable with our initial loan underwriting on these loans, and we believe we generally have loan-to-value ratios in this portfolio that will weather the downturn reasonably well.

Now for our agricultural update. Our first round of crop inspections is under way. But during the quarter, agricultural real estate balances were down $1.6 million over the quarter and up $2.6 million for the fiscal year, while agricultural production loan balances increased $13 million for the quarter and $4.5 million for the fiscal year. Our agricultural customers are in mid-stage of their crop production with all crops, including double crop soybeans planted and growing well. Our overall crop mix, consists of 30% soybean, 25% corn, 25% cotton, 15% rice, and 5% in specialty crops, including popcorns and peanuts.

Some crops had a late start due to the spring rains. However, we estimate that our farmers planted 75% of their plant corn acreage, and the majority of their corn is tasseled and growing well, and looks to be in favorable to better-than-average conditions, and yields are expected to exceed historical averages. Some of the 2024 acreage was diverted to popcorn when farmers were able to contract popcorn at attractive prices. Rice planting has went well for this crop year, with the majority of our farmers planting most of their plant acreage. The crop is growing well and if weather conditions, therefore pollination yields are expected to be at or above historical averages.

Our cotton farmers planted 75% approximately as their planned acreage for 2020. The crop is growing well and looks good at this time. Cotton yields, at this time, are expected to be at or above historical averages. Our farmers planted 100% of their planned soybeans for this year, plus some extra as part of the increase in acreage that was diverted from corn and cotton due to weather conditions in the spring.

In comparison to our prices for the 2020 underwriting, corn prices are trending approximately 10% lower, soybeans are running approximately 3% higher, rice is trending slightly lower and cotton is approximately 13% lower than projected. Livestock prices are also trending below underwriting prices for our cattle farmers, as they're continuing to hold cattle bidding on additional ways before sending them to market. The majority of our cattle farmers has to hold their cattle longer this spring than usual due to the pandemic.

With livestock auctions being closed due to the pandemic, however, additional aid came to our livestock farmers in the form of government payments from the coronavirus food assistance program that helped to offset lower livestock prices. There's still instability in some of our markets related to the pandemic and the uncertainties that it brings to the agricultural economy that we still came totally foreseen.

Overall, we think our farmers will have an average to above average crop for 2020. And most of our farmers are expecting at least a breakeven year. Farmers are also hoping for additional assistance before government payments from the USDA to come, similar to what they received in 2019 under the market facilities program, though it helped them greatly with trending lower commodity prices.

Matt, would you go ahead with our financial results?

Matt Funke -- Executive Vice President, Chief Financial Officer

Sure. Thanks, Greg.

We earned $0.76 diluted in the June quarter, which is the fourth quarter of our fiscal year. That's up from -- that's up $0.21 from the linked March quarter, and it's down $0.05 from the $0.81 we earned in the June 2019 quarter. Provision for loan losses remained relatively high compared to our normal levels, but it was down from the linked quarter. We had significant charges related to the acquisition of Central Federal Bancshares, good results on margin and good results on non-interest income. We also saw good results on our non-performing loans, non-performing asset balances this quarter. NPLs were down $2.8 million to end at 40 basis points on gross loans and NPAs were down $3.6 million to end at 44 basis points on total assets. Both are down by more than half since the prior fiscal year-end, and that's because we've worked to resolve problem loans from the Gideon acquisition that took place in the middle of the prior fiscal year.

Net charge-offs were up a bit in the June quarter, and they were 4 basis points annualized, which is the same as our trailing 12-month figure. A year ago, our trailing 12-month figure was 2 basis points. Outside of the Central Federal acquisition, our loan portfolio shrank just slightly, excluding the 100% SBA-guaranteed Paycheck Protection Program loans, but we still provisioned at a higher-than-normal level due to continued economic uncertainties surrounding the COVID-19 pandemic. We provisioned $1.9 million, which increased the allowance by $1.6 million.

As a percent of gross loans, our allowance decreased to 1.16% at June 30th, down 2 basis points from March 31st, but up 9 basis points from June 30th a year ago. Outside of the PPP loans, the allowance would have been 1.24% as a percent of gross loans. We do continue to work toward implementation of the current expected credit loss accounting standard, or CECL, which under FASB pronouncement is effective for the Company on July 1st, 2020. The CARES Act provides for an extension of time for us to an adopt -- for us to adopt though not beyond calendar year-end. And while we're evaluating that option, we continue to work toward adoption on July 1st.

Our net interest margin in the fourth quarter was 3.75%, which included about 6 basis points of benefit from fair value discount accretion on our acquired loan portfolios or about $361,000 in dollar terms. We also realized benefits of about $159,000 on a limited number of loans that had previously been classified as non-accrual. Those then benefited the margin by another 3 basis points.

A year ago, in the June quarter, our margin was 3.77%, of which 12 basis points resulted from the fair value discount accretion. So on what we see as a core basis, our margin was up about 1 basis point, comparing to June '20 quarter to the June '19 quarter. We see our core asset yield dropping by 45 basis points, core cost of deposits also dropping 45 basis points, and our total core cost of funds down 47 basis points. Compared to the linked March quarter, when our reported margin was 3.63%, and we had 8 basis points of benefit from discount accretion, we see our core margin up about 11 basis points sequentially.

Last quarter, we were cautiously optimistic about margin in the near-term as we expected the rate reductions we had made early in the June quarter on non-maturity accounts would lower our cost of funds significantly. From here, I think we'd be pleased if we could report limited margin compression as we would expect repricing activity on loans may outpace any further reductions in the cost of funds we're able to realize.

Non-interest income was up significantly compared to the year ago period, as declines in deposit service charges were more than offset by better gains on secondary market residential loans that we originate and sell. We saw better loan servicing income as compared to the year ago and linked period, each of which included recognition of impairment charges of $207,000 and $391,000, respectively, on the value of our mortgage servicing rights.

In this June quarter, we increased our loans under servicing by about 13% or $20 million. Bank card interchange income increased compared to the year ago period with a 14% increase in dollar volume and incentive benefits under a new processing contract. We're remaining cautious about our expectations for the coming year on interchange income as spending could have benefited from the CARES Act payments to depositors and unemployment benefits, which look to be, at least, reduced.

Relatedly, our deposit service charges, which include NSF charges, declined year-over-year, despite a 12% per item increase in the charge and they declined sequentially, which is unusual for our normal seasonal pattern. Central Federal, that acquisition resulted in no goodwill and a $123,000 bargain purchase gain, contributing to non-interest income. As a percent of average assets, non-interest income annualized was 80 basis points, which is 12 basis points higher than the same quarter a year ago and 14 basis points higher as compared to the linked quarter, and that bargain purchase gain contributed 2 points of the improvement.

Non-interest expense showed a significant increase compared to the same quarter a year ago or the linked quarter up almost 27% and 14%, respectively. In this quarter, this current quarter, we had $1.1 million in merger and acquisition expense, none in the same period a year ago and just $76,000 in the linked quarter. We also, in the current quarter had $149,000 in non-recurring losses from the disposition of a vacant bank property that we had acquired in the Capaha acquisition. And we also recorded a charge for provision for off-balance sheet credit exposure at $132,000 as compared to a recovery of $46,000 in the same quarter a year ago, but down from a charge of $300,000 in the linked quarter.

Looking at ongoing items and non-interest expense, we saw increases in our expenses and losses on foreclosed properties, our FDIC deposit insurance assessment, as the assessment credits were mostly utilized in the prior quarter. Saw modest increases quarter-over-quarter in compensation, increases due to bank card network expenses on the higher volume and higher occupancy and data processing.

Compared to the same quarter a year ago, we saw a larger compensation increases as we've added personnel and adjusted compensation year-over-year. We're seeing higher data processing expenses under a new data processing contract that took effect early in fiscal 2020. We saw, again, higher bank card expenses and higher expenses on foreclosed properties. On what we look at as a core basis, we're seeing pretty consistent non-interest expense outside of M&A, the fixed asset losses and outside of the charges or recoveries for off-balance sheet credit exposure.

Over to the balance sheet, we saw much stronger loan growth in the June quarter, as the PPP loans more than offset what have -- what would have otherwise been a modest decline in the portfolio outside of the acquisition. Compared to a year ago, we're up almost $250 million. And if you back out the PPP loans, we would have been up about $117 million or about 6.3%, down from 8.9% last year, both exclusive of M&A. Deposits, meanwhile, were up $213 million in this June quarter. Outside of the Central Federal acquisition, we would have been up $166 million, almost all of it coming from non-maturity deposits. We noted in the earnings release that some of this growth is likely attributable to businesses holding funds after their PPP loans or deferring tax payments as allowed under the CARES Act.

Brokerage funding was up by about $6 million in the current quarter. Public unit deposits, up $13 million. Outside of any brokered funding, time deposits were up very modestly this quarter and are roughly flat year-over-year after growing almost 14% last year. Non-maturity balances were up 21% this year as compared to about 3% last year outside of brokered activity or acquisitions.

Greg, let me hand it back over to you here.

Greg Steffens -- President, Chief Executive Officer

Okay. Thanks, Matt. In regards to our loan growth, our portfolio would have grown slightly outside the acquisition in the PPP loans, but we remained reasonably pleased with our rate of loan growth for the fiscal year. Looking forward, we would expect growth to be limited outside the impact of PPP loan forgiveness.

Our organic growth for the year was led by increases of single family, multifamily, residential, non-owner occupied CRE loans and construction loans. Residential property loans, including multifamily and single-family loans have grown faster over the recent quarters. During recent periods, our CRE concentration has moved from 255% of regulatory capital at June 30th, '19, to 280% at March 31st, '20, and has been relatively stable at 278% at June 30th, 2020.

Our volume of originations was strong in the June quarter, totaling $310 million, which includes PPP loans, which is up to $186 million compared to the same period of the prior year. For the fiscal year, loan originations totaled $848 million, up $242 million from the prior fiscal year. Our loan pipeline for loans to fund in 90 days was at $86.6 million at June 30th, as compared to $83 million at June 30th, 2019, and $77 million at March 31st.

The pipeline continues to be diverse in nature and it's fairly similar to our existing portfolio mix. We continue to lack a good read at this time as to what we should expect for growth within the pipeline, knowing what will ultimately close or what may fall out for changes in economic conditions. But again, we would expect slower loan growth in the next several quarters. Again, we're pleased with our deposit growth for the year, and we're just really wondering what will happen with some of those balances as time progresses. When we look at M&A activity, we have not looked at any potential partners over the last quarter, as anyone that we were talking with has put any plans for a partnership on hold since the outbreak of the pandemic.

The Company did complete its acquisition of Central Federal on May 22nd with the data systems conversion completed over the weekend of June 5th to 7th. We don't expect to hear much in a way of M&A opportunities or to be pursuing any for the time being. We did announce our stock repurchase plan of 450,000 shares in November 2018. During the June quarter, there were no purchases under this plan as we suspended activity at the close of business on March 26th. Repurchases during the fiscal year totaled 182,598 shares of the Company's stock at an average price of $31.61. The Company will continue to evaluate whether it resumes activity under this repurchase plan, as the impact of the pandemic is more fully understood.

We continued at our previous dividend level of $0.15 per share for the August quarterly dividend, and our intention would be to continue to pay regular dividends as long as it is safe and sound to do so.

That concludes my remarks.

Matt Funke -- Executive Vice President, Chief Financial Officer

All right. Thank you, Greg. At this time, Keith, we'd like to take any questions our participants may have. So if you would, please remind folks how they can queue for questions, and we'll answer what we can.

Questions and Answers:

Operator

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question comes from Andrew Liesch with Piper Sandler.

Andrew Liesch -- Piper Sandler -- Analyst

Good afternoon guys.

Matt Funke -- Executive Vice President, Chief Financial Officer

Good afternoon, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

Hi. So a couple of questions here. Just on -- you mentioned the cost of funds and the cost of deposits declining in the quarter. Do you have what those figures were for the fourth quarter?

Matt Funke -- Executive Vice President, Chief Financial Officer

Fourth quarter? One second. I'm thinking they were just slightly below one in both case.

Andrew Liesch -- Piper Sandler -- Analyst

Okay. So, if that's the case, I mean, it sounds like with the margin now, that you expect earning assets to reprice faster than funding costs, but -- or than funding, but it seems like with the cost of deposits just below one, there's still some room to go just given the rate environment. Is there any like repricing? Or are there some higher-priced CDs in there that are going to remain on the balance sheet? Or what's to prevent some further reductions in funding cost this quarter?

Matt Funke -- Executive Vice President, Chief Financial Officer

I don't think there's anything that would prevent some further reductions, and the CD portfolio is not particularly long or concentrated in any way. It's just that, generally, we've had competition locally that has prevented us from going as low as maybe what you've seen with some of the larger regional banks in terms of their overall cost of deposits. And I certainly don't want to say we won't continue to work to lower that further, but I wouldn't expect continued declines like we had in this most recent quarter.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. Okay. That's helpful. And then of the $132 million of PPP, it sounds like you're going to start working through the forgiveness process next month. When we get to the end of this calendar year, how much of that $132 million do you think is still around? Do you think 80% of it's left? How much spillover do you think remains into the next year? Just what's your outlook given your conversations with the PPP customers?

Greg Steffens -- President, Chief Executive Officer

We would anticipate that somewhere between 80% and 90% of the PPP balances extended would be repaid by the end of the year were forgiven, end of the calendar year.

Andrew Liesch -- Piper Sandler -- Analyst

Okay. Got you. That's helpful. And then just of the $5.1 million in total non-interest income for the quarter, what was the mortgage banking gain on sale piece of that $5.1 million?

Matt Funke -- Executive Vice President, Chief Financial Officer

It would have been -- Andrew, on your other question, cost of funds was 97 basis points for the quarter, cost of deposits was 91 basis points. And the gains on loan sales would have been a little less than $1 million.

Andrew Liesch -- Piper Sandler -- Analyst

Okay, great. That covers my questions. I'll step back. Thanks.

Operator

Thank you. And the next question comes from Kelly Motta with KBW.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Hi, good afternoon everyone. I wanted to ask you about the PPP recognition, the fee recognition. About how much contribution was that to this quarter to NII?

Matt Funke -- Executive Vice President, Chief Financial Officer

In dollar terms, it's running, I think, about $200,000 a month, Kelly. And in terms of the yield on those loans, it's along with the 1% coupon, it's an effective yield of about 3% on those loans.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Okay. And -- got it. Let's see. And then, with CECL, you mentioned that you're -- it seems like you're preparing to adopt as initially planned on July 1st. Are you at a point where you have a preliminary estimate on the reserve build that would come under CECL as you move to that standard?

Matt Funke -- Executive Vice President, Chief Financial Officer

No, unfortunately, we're not.

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

Got it. Alright, thank you.

Matt Funke -- Executive Vice President, Chief Financial Officer

Thanks, Kelly.

Operator

Thank you. [Operator Instructions] All right. As there are no more questions at the present time, I would like to return the floor to management for any closing comments.

Matt Funke -- Executive Vice President, Chief Financial Officer

All right. Thank you again to everyone for joining us. Appreciate your interest, and we'll speak again in three months.

Operator

[Operator Closing Remarks].

Duration: 29 minutes

Call participants:

Matt Funke -- Executive Vice President, Chief Financial Officer

Greg Steffens -- President, Chief Executive Officer

Andrew Liesch -- Piper Sandler -- Analyst

Kelly Motta -- Keefe, Bruyette & Woods -- Analyst

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